Abstract
Recent economic data reveal that, at the infant stage, China's outward foreign direct investment (FDI) is biased towards tax havens and Southeast Asian countries and are mostly conducted by state-controlled enterprises with government sanctioned monopoly status. Further examination of China's savings rate, corporate ownership structures, and bank-dominated capital allocation suggests that, although a surge in China's outward FDI might be economically sensible, the most active players have incentives to conduct excessive outward FDI while capital constraints limit players that most likely have value-creating FDI opportunities. We then discuss plausible firm-level justifications for China's outward FDI, its importance, and promising avenues for further research.
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Notes
This pattern of comparisons is particularly clear if we consider the outward FDI on a per capita basis.
Cross-listing abroad may also provide Chinese companies with greater access to overseas capital markets. However, merely cross-listing abroad need not constitute FDI. For example, so-called “red chip” stocks – Chinese SOE firms listing in Hong Kong, but locating all their assets on the mainland – do not constitute outward FDI to Hong Kong. A Chinese company must locate actual capital assets abroad to contribute to China's outward FDI.
Indeed, we are not even sure if the published data adequately capture the funds flowing from China into Hong Kong.
National SOEs refer to SOEs controlled by the central government. In China, there are SOEs controlled by various level of government, for example, provincial and municipal.
On 16 May 2007 the Development and Reform Commission of China announced government support for outward FDI projects that can alleviate China's resource bottleneck, facilitate industrial upgrade, improve innovation capabilities, and increase the competence of Chinese firms on the global market.
A recent reform beginning in 2005 aims at eliminating trading right differences between tradable and non-tradable shares, that is, making all shares tradable. However, even after the reform, the state shareholders can sell their holdings only with the approval of the state-owned assets authorities.
Parts of this discussion draw on Morck, Yeung, and Zhao (2005).
For example, the 169 national SOEs have never paid dividends to the state. A new proposal is under consideration to require dividend payment on state shares, beginning in 2007.
Caijing, Volume 174, 11 December 2006.
If earnings beyond profitable investment needs were disbursed to shareholders, they would show up either as consumption and household investment goods (e.g., houses, cars), or as additional household savings (bank deposits or portfolio investments).
These are often called “image projects” (
) or “political achievement project” (
).Stephen Thomas and Chen Ji: Banking on Reform, in China Business Review, a publication of US–China Business Council, May–June 2006.
See the table in Chapter 2, Economic Survey of China, Paris: OECD, September 16, 2005. The survey defines private enterprises as those controlled by individuals or legal persons, in contrast to the “state-controlled” and “collectively controlled”.
For example, the Ministry of Commerce and the UNCTAD jointly organized the annual “International Forum on Chinese Companies Going Global” in Beijing in 2006 and 2007.
) or “political achievement project” (
).References
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Acknowledgements
We are grateful for helpful comments from William Allen, Jun Huang, Tom Pugel, Alan Rugman, Myles Shaver, Jordan Siegel, Changqi Wu, the Editor Arie Lewin, and two anonymous reviewers.
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Accepted by Arie Y Lewin, Editor-in-Chief, 27 September 2007. This paper has been with the authors for two revisions.
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Morck, R., Yeung, B. & Zhao, M. Perspectives on China's outward foreign direct investment. J Int Bus Stud 39, 337–350 (2008). https://doi.org/10.1057/palgrave.jibs.8400366
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DOI: https://doi.org/10.1057/palgrave.jibs.8400366